Impact of deflationary fiscal policy in UK

A report by NIESR suggests that austerity pursued by the government in 2010, needlessly led to a delayed economic recovery and could have cost the UK 5% of GDP or £1,500 per person.

economic-growth-quarterly

The austerity was unnecessary because

  • The lower growth led to delayed rises in tax increases and
  • Interest rates were at 0%, and demand for government bonds high.
  • By delaying budgetary changes until the recovery was stronger, the government could have avoided a double dip downturn and still be able to reduce debt to GDP in the long term.

The impact of the deflationary fiscal policy could have been worse if:

  • The government had stuck to its initial austerity targets for cutting spending even more over the first Parliament
  • If the Bank of England had not used monetary policy to offset the decline in aggregate demand.

 

“The delay in the UK recovery over the first part of the coalition government’s term is at least in part a result of the government’s fiscal decisions. I have argued that these decisions were a mistake… It will be many years before we can settle on a figure for the total cost of that mistake, but measured against the scale of how much governments can influence the welfare of its citizens in peace time, it is likely to be a large cost.”

Professor Simon Wren-Lewis NIESR

Impact of discretionary fiscal policy

OBR
OBR October 2014

Implied discretionary fiscal change

change budget
OBR October 2014

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Independent – No Victory lap for George

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One thought on “Impact of deflationary fiscal policy in UK

  1. Public sector (non-marketed) output is included at cost, even if it produces nothing useful. Increases in such spending can add to recorded GDP, even if they are wasteful. Beneficial cuts in such spending way show as reductions in GDP….a little perverse!

    Even if any resources no longer wasted are redeployed productively, so output is increased, recorded GDP may fall.

    Just looking at GDP in aggregate may hide important facts.

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